If you’re looking for a flexible financing option, a personal line of credit could be the right fit for you. A personal line of credit (LOC) is a revolving loan, which means you can pull funds from it whenever you want and repay the principal any time. A line of credit (LOC) is a lower-cost borrowing option than a credit card.

Payments on lines of credit may vary between financial institutions. At ATB, interest-only payments on any borrowed funds are required on the last day of the month. After you repay what you owe, you’ll be able to use those funds as often as you like.

Interest and making payments

You can access a line of credit loan the same way you would any of your deposit accounts—with your debit card at an ABM, ATB branch or through online banking. The debit card you use must be assigned to the account, or you can make a transfer from your line of credit to your chequing account. You have the option to make manual payments or set up automatic payments from your deposit account.

With a line of credit, you’re accountable for making a minimum payment each month, and usually, this minimum payment is equal to the monthly interest. However, you’ll always have the option to repay more, which we encourage. Paying back the interest plus a little more will decrease the total amount owing, decreasing your debt and future interest payments. Interest rates are variable and based on ATB’s prime rate.

The minimum month end required payment can come from your linked chequing account. If the line of credit is carrying a balance, your attached chequing account will automatically take any deposits made into the chequing account and put them towards the balance on the line of credit.

For example, say your line of credit has a balance owing of $5,000. A biweekly deposit of $1,000 comes into the attached chequing account every other Thursday. That $1,000 deposit will be automatically transferred into the line of credit to recover some of the outstanding balance—now you only owe $4,000. That automatic transfer into your chequing account is considered part of the mandatory month end interest-only payment into the line of credit.

What makes a line of credit different from a loan or a credit card?

Line of credit versus loan

Unlike a line of credit, a loan has a fixed end date and a fixed repayment schedule. Once you pay back the loan, you no longer have access to its funds. Monthly payments on a loan are always a fixed amount, whereas a minimum payment on a personal line of credit is the interest charged on the amount owing. That means your line of credit repayment can change from month to month.

Line of credit versus credit card

A line of credit and a credit card are both revolving loans—once you pay them back, you do have access to the funds again. There are two main differences between them—how you make repayments and interest rates.
With credit cards, you owe a minimum monthly payment of the balance owing, including interest. With lines of credit, you owe the monthly interest on the total balance for the month. When comparing interest rates, a credit card will usually have a higher interest rate than a line of credit.

Secured line of credit versus unsecured line of credit

You can secure a line of credit loan by putting collateral (a tangible asset) against it—the most commonly used collateral is property. The advantage of securing the line of credit is it will lower the interest rate you’ll have to pay on the amount you borrow.

An unsecured line of credit doesn’t have collateral put against it. Otherwise, it works the same as a secured line of credit, but will typically have a higher interest rate. While the interest rate of an unsecured line of credit is generally lower than a credit card, it may be higher than a loan.

Discover how to use a credit card and line of credit effectively.

When should you use a line of credit?

Typically, you wouldn’t use a line of credit for significant one-time purchases that take years to pay off, like a new car. In that case, a regular loan makes sense since you need a fixed amount. There’s also no benefit to using a line of credit for your daily transactions since you’d have to pay interest on it. Here are some situations where you might use a line of credit:

Lend and spend

One strategy to reduce your interest load and gain the benefits of a credit card purchase (like earning rewards points and having purchase protection insurance) is to make a large purchase on your credit card, and then pay off the credit card with your line of credit. You can then pay back your line of credit with a lower interest rate instead of paying your credit card’s higher interest rate.

Emergencies

A line of credit offers security in emergencies if you don’t have a dedicated emergency fund in place. For example, you can use a line of credit to pay for unexpected expenses, like a significant home repair. If you’re expecting your financial commitments to be more than the cash you have available at the end of the month—and you don’t have a savings account to lean on—a line of credit can help you through it.

Instead of a credit card

If you’re making a bigger purchase that you plan to have paid off within a year—like a large appliance, central AC unit or home gym equipment—a line of credit is a great solution. An advisor can collaborate with you to set a payment schedule that allows you to pay off the item within a period of time.
A line of credit is a lower-cost borrowing option compared to credit cards, so you’ll pay less interest. Plus, with flexible repayments, you can pay back the principal (the original amount you borrowed) when extra funds come your way, and you’ll be able to access those funds again when you need them.